Monday, January 30, 2012

What is the difference between printing money and counterfeiting? There is none.

Counterfeiting is illegal because it is the false creation of value. The counterfeiter takes low-value paper and turns it into high-value money, which is fundamentally a claim on the real productive value of the economy that issues the currency and recognizes it as a proxy means of exchanging that productive value.

Counterfeiting is illegal because the counterfeiter creates no additional value--he creates only the proxy for value. Creating real value--adding meaningful goods or services to the economy--is tedious, hard work. How much easier to simply transform near-worthless paper into a claim on actual goods and services.

If this is illegal, then would somebody please arrest the Board of the Federal Reserve for counterfeiting? The Fed has blatantly printed money without creating any real value to back up their added claims on productive value. Hence they are counterfeiting, pure and simple. A government based on rule of law would arrest these fraudsters and cons at the earliest possible convenience.

And while you're drawing up the indictment, can you also charge them with counterfeiting competence and policy, as they have demonstrated the Peter Principle par excellence: the Board has risen to its highest level of incompetence. Their counterfeit policies have wreaked incomparable damage on the real productive economy.

The essence of counterfeit policy--a fake policy that claims to be something it is not--is "extend and pretend." And the sole goal of "extend and pretend" is self-preservation and the preservation of the Financial Elite which has tightened its grip on the nation's throat as a direct consequence of Federal Reserve policies--notably "extend and pretend."

"Extend and pretend" extends the "too big to fail" Financial Sector's licence to mask its insolvency and its licence to continue issuing debt, leverage and derivatives under false pretences, i.e. that the risk and market value of these instruments are transparent. They are not.

In effect, the banks are also counterfeiters, as they are issuing debt--a claim on future productive value--without adding any actual value to the economy.

Thus the Fed and the Financial Sector are both diluting the base of actual real value with ever-expanding claims on real productive value by printing money and issuing debt. If an economy creates 100 units of productive value, and issues 100 units of currency as a proxy claim on that value to be used as a means of exchange, then there is a 1-to-1 correspondence with the money claim on productive value and the actual value.

If someone prints another 100 units of money and starts buying assets with that money, then they are claiming 1 unit of money still equals 1 unit of production though they have debased the currency so that it actually takes 2 units of money to represent 1 unit of productive value.

This is a con of the first order, which is why counterfeiting is illegal. If counterfeiting is illegal because it is a con, a fraudulent claim on real goods, services and assets, then how can money printing by the Fed (a private bank, mind you) be legal?

It can only be legal in a kleptocracy ruled by a Financial Elite bent on political and financial dominance, a Plutocracy whose wealth is all skimmed from the productive economy via ever-expanding issuance of money and debt.

When corporations and the State are one, we call it fascism. In the U.S., it has taken the form of financial fascism, and the Federal Reserve and Federal agencies (Treasury, Freddie Mac, FHA, etc.) are the handlers and enablers of this kleptocratic financial fascism. They add no value, they only steal value from those who create it.

What do you do when flood waters threaten the dam? If you're the Federal Reserve, you close the floodgates and let the water rise.

Metaphors have an uncanny ability to capture the essence of complex situations. Here is one dam metaphor that distills and explains the entire global financial system in 2012. The way to visualize the current situation is to imagine a dam holding back rising storm waters.

The dam is the regulatory system, the rule of law, trust in the transparency and fairness of the system and the machinery of perception management. All of these work to keep risk, fraud and excesses of speculation and leverage from unleashing a destructive wave of financial instability on the real economy below.

As legitimate regulation and transparency have been replaced with simulacra and manipulated data, the dam's internal strength has been seriously weakened.

Depending on how you date various rivers of financialization, water has been piling up behind the dam since either 1982, 1992 or 2000. In this metaphor, the water is comprised of multiple sources of destabilization: rising money supply, debt, speculation, leverage, fraud, shadow banking and lax regulation.

Common sense suggests that water rising to dangerous levels would trigger an official response of opening the floodgates to relieve the pressure. Unfortunately for the real economy, common sense has nothing to do with the official response of central governments and banks. Their entire raison d'etre (reason to be) is self-preservation and the preservation of the financial Elites that set the context and policy of the State and central bank.

In effect, the State and central bank recognize that it is highly dangerous to let any water out, lest the toxic waste of fraud, speculative incentives, excessive leverage, etc. corrode the spillway and cause the entire dam to give way.

The official rationalization for keeping the gates closed even as the water is rising to the very lip of the dam is that the flood water released might harm the real economy downstream.

The truth is less savory: letting any water out might reveal the vulnerability of the entire system to collapse and the complicity of the official State agencies and central bank in the decades-long process of piling up too much debt, leverage, fraud and speculation in the first place.

To avoid the exposure of their own complicity and incompetence, the officials would rather risk systemic collapse of the dam. The global exercise of masking the true risks in the system can be summarized as "extend and pretend," and for the the past four years, officials have promised that closing the floodgates and keeping all the toxic debt, leverage and fraud safely behind the dam is the "solution" to rising floodwaters.

That "solution" was temporary, and 2012 is the year that the water reaches the lip of the dam and starts spilling over. The only question for those in the real economy downstream is whether this spillage will be enough to relieve the mounting pressure or whether the dam will suddenly give way.

If the rivers of toxic debt, leverage and fraud continue flowing into the system, then the only way to relieve the pressure is to release more of the debt, leverage, risk and fraud than is entering the system. "Extend and pretend" does nothing to limit the inflow of toxic debt, leverage, fraud, etc., nor does it release any bad debt or shut down the sources of toxic flodwaters, i.e the shadow banking system and the Financial Elite perpetrators of fraud.

Will the dam of extend and pretend hold another year? Perhaps, but I suspect the toxic waters have corroded the spillways of trust and resiliency to the point that any official attempt to relieve the pressure will trigger the dam's collapse.

Saturday, January 28, 2012

Massive intervention by Federal agencies and the Federal Reserve have kept the market from discovering price and the risk premium in real estate. That sets up a "catch the falling knife" possibility for impatient real estate investors.

A substantial percentage of many households' net worth is comprised of the equity in their home. With the beating home prices have taken since 2007, existing and soon-to-be homeowners are keen to know: Are prices stabilizing? Will they begin to recover from here? Or is the "knife" still falling?

To understand where housing prices are headed, we need to understand what drives them in the first place: policy, perception, and price discovery.

In my December 2011 look at housing, I examined systemic factors such as employment and demographics that represent ongoing structural impediments to the much-awaited recovery in housing valuations and sales. This time around, we're going to consider policy factors that influence the housing market.

Yesterday while standing in line at our credit union I overheard another customer at a teller’s window request that her $100,000 Certificate of Deposit (CD) be withdrawn and placed in her checking account because, she said, “I’m not earning anything.” The woman was middle-aged and dressed for work in a professional white- collar environment -- a typical member, perhaps, of the vanishing middle class.

Sadly, she is doing exactly what Ben Bernanke’s Federal Reserve policies are intended to push people into doing: abandoning capital accumulation (savings) in favor of consumption or trying for a higher yield in risk assets such as stocks and real estate.

It may strike younger readers as unbelievable that a few decades ago, in the low-inflation 1960s, savings accounts earned a government-stipulated minimum yield of 5.25%, regardless of where the Fed Funds Rate might be. Capital accumulation was widely understood to be the bedrock of household financial security and the source of productive lending, whether for 30-year home mortgages or loans taken on to expand an enterprise.

How times -- and the US economy -- have changed.

Now the explicit policy of the nation’s private central bank (the Federal Reserve) and the federal government’s myriad housing and mortgage agencies is to punish saving with essentially negative returns in favor of blatant speculation with borrowed money.Official inflation is around 3% and savings accounts earn less than 0.1%, leaving savers with a net loss of about 3% every year. Even worse -- if that is possible -- these same agencies have extended housing lenders trillions of dollars in bailouts, backstops and guarantees, creating institutionalized moral hazard on an unprecedented scale.

Recall that moral hazard simply means that the relationship between risk and return and has been severed, so risk can be taken in near-infinite amounts with the assurance that if that risk blows up, the gains remain in the hands of the speculator. Another way of describing this policy of government bailouts is “profits are private but losses are socialized.” That is, any profits earned from risky speculation are the speculator’s to keep, while all the losses are transferred to the public.

While the housing bubble was most certainly based on a credit bubble enabled by lax oversight and fraudulent practices, the aftermath can be fairly summarized as institutionalizing moral hazard.

Policy as Behavior Modification and Perception Management

Quasi-official pronouncements by Fed Board members suggest that the Fed’s stated policy of punishing savers with a zero-interest rate policy (ZIRP) is outwardly designed to lower the cost of refinancing mortgages and buying a house. The first is supposed to free up cash that households can then spend on consumption, thereby boosting the economy. With savings earning a negative yield, consuming more becomes a tangibly attractive alternative. (How keeping the factories in Asia humming will boost the American economy is left unstated.)

This near-complete destruction of investment income from household savings yields a rather poor return. Plausible estimates of the total gain that could be reaped by widespread refinancing hover around $40 billion a year, which is not much in a $15 trillion economy.

There are real-world limits on this policy as well. Since the Fed can’t actually force lenders to refinance underwater mortgages, millions of homeowners are unable to take advantage of lower rates. From the point of view of lenders, declining household incomes and mortgages that exceed the home value (so-called negative equity) have lowered the creditworthiness of many homeowners.

As a result, the stated Fed policy goal of lowering mortgage payments to boost consumer spending has met with limited success. Somewhat ironically, the mortgage industry’s well-known woes -- extended time-frames for involuntary foreclosure, lenders’ hesitancy to concede to short sales (where the house is sold for less than the mortgage and the lender absorbs a loss), and strategic/voluntary defaults -- may be putting an estimated $80 billion in “free cash” that once went to mortgages into defaulting consumer’s hands.

The failure of the Fed’s policies to increase household’s surplus income via ZIRP leads us to the second implicit goal, lowering the cost of home ownership via super-low mortgage rates, which serves both as behavior modification and perception management. If low-interest rate mortgages and subsidized Federal programs that offer low down payments drop the price of home ownership below that of renting an equivalent house, then there is a substantial financial incentive to buy rather than rent.

The implicit goal is to shape a general perception that the bottom is in, and it’s now safe to buy housing.

First-time home buying programs and FHA (Federal Housing Authority) and VA (Veterans Administration) loans all offer very low down-payment options to qualified buyers. This extends a form of moral hazard to buyers as well as lenders: If a buyer need only scrape up $2,000 to buy a house, their losses are limited should they default to this same modest sum. Meanwhile, lenders working under the guarantee of FHA- and VA-backed loans are also insured against losses.

The Fed’s desire to boost home sales by any means available is transparent. By boosting home sales, it hopes to stem the decline of house valuations and thus stop the hemorrhaging of bank losses from writing down impaired loan portfolios, and also stabilize remaining home equity for households, which has shrunk to a meager 38% of housing value.

As many have noted, given that about 30% of all homes are owned free and clear, the amount of equity residing in the 70% of homes with a mortgage may well be in the single digits. (Data on actual equity remaining in mortgaged homes is not readily available, and would be subject to wide differences of opinion on actual market valuations.)

Broadly speaking, housing as the bedrock of middle class financial security has been either destroyed (no equity) or severely impaired (limited equity). The oversupply of homes on the market and in the “shadow inventory” of defaulted/foreclosed homes awaiting auction has also impaired the ability of homeowners to sell their property; in this sense, any remaining equity is trapped, as selling is difficult and equity extraction via HELOCs (home equity lines of credit) has, for all intents and purposes, vanished.

The Fed’s strategy, in conjunction with the government-owned and -operated mortgage agencies that own or guarantee the majority of mortgages in the US (Fannie Mae, Freddie Mac, FHA, and the VA), is to stabilize the housing market through subsidizing the cost of mortgage borrowing by shifting hundreds of billions of dollars out of savers’ earnings with ZIRP.

Since roughly 60% of households either already own a home or are ensnared in the default/foreclosure process, then the pool of buyers boils down to two classes: buyers who would be marginal if not for government subsidies and super-low mortgage rates, and investors seeking some sort of return above that of US Treasury bonds. The Fed has handed investors two choices to risk a return above inflation: equities (the stock market) or real estate. Given the uneven track record of stocks since the 2009 meltdown, it is not much of a surprise that investors large and small have been seeking “deals” in real estate as a way to earn a return.

Recent data from the National Association of Realtors concludes that cash buyers (a proxy for investors) accounted for 31% of homes sold in December 2011. Even in the pricey San Francisco Bay Area, where median prices are still in the $350,000 range, investors accounted for 27% of all sales. Absentee buyers (again, a proxy for investors) paid a median price of around $225,000, substantially lower than the general median price.

This data suggests that “bargain” properties are being snapped up for cash, either as rental properties or in hopes of “flipping” for a profit after some modest cleanup and repair.

Price and Risk Premium Discovery

There is one lingering problem with the Fed and the federal housing agencies’ concerted campaigns to punish capital accumulation, push investors into equities or real estate, and subsidize marginal buyers to boost sales at current valuations. The market cannot “discover” price or establish a risk premium when the government and its proxies are, in essence, the market.

By some accounts, literally 99% of all mortgages in the U.S. are government-issued or -guaranteed. If any other sector was so completely owned by the federal government, most people would concede that it was a socialized industry. Yet we in the US maintain the fiction of a “free market” in mortgages and housing.

To establish a truly free and transparent market for mortgages and housing, we would have to end all federal subsidies and guarantees/backstops, and restore the market as sole arbiter of interest rates -- i.e., remove that control from the Federal Reserve.

Everyone with a stake in the current market fears such a return to an open market because it is likely that prices would plummet once government subsidies, guarantees, and incentives were removed. Yet without such an open market, buyers can never be certain that price and risk have truly been discovered. Buyers in today’s market may feel that the government has removed all risk from buying, but they might find that they “caught the falling knife;” that is, bought into a false bottom in a market that has yet to reach transparent price discovery.

So, the key question still remains for anyone who owns a home or is looking to soon own one...how close are we to the bottom in housing prices?

In Part II: Determining the Housing Bottom for Your Local Market, we tackle that question head-on. Because local dynamics inevitably play such a large role in determining fair pricing for any given market, instead of giving a simple forecast, we instead offer a portfolio of tools and other resources for analyzing home values on a local basis. Our goal is to empower readers to calculate an informed estimate of "fair value" for their own markets -- and then see how closely current local real estate prices fit (or deviate) from it.

Friday, January 27, 2012

With everything from stocks and bonds to 'roo bellies rising as one trade, it may be a good time to ask: what's priced into the market's uptrend? We say "bad news is priced in" when negative news is well-known and the market has absorbed that information via the repricing process.

When the market has absorbed all the "good news," then we say the market is "priced to perfection:" that is, the market has not just priced in good news, it has priced in the expectation of further good news.

Markets that are priced to perfection are fiendishly sensitive to unexpected bad news that disrupts the expectation of continuing positive news.

So what have global markets priced into this uptrend across virtually all markets?Just as a partial list, we might include:

1. The Eurozone's sovereign debt/banking crisis has either been resolved or lowered to a simmer that won't damage global financial markets.

2. The austerity resulting from the extend-and-pretend fixes to the Eurozone's crushing debt and insolvent banking system will do no more than dent the Eurozone's major economies in 2012.

3. The U.S. economy has dodged recession and is growing slowly but surely.

4. All the primary metrics of that growth such as employment, GDP and retail sales are all rising smartly and will certainly continue on that rising trendline.

5. The bursting China's real estate bubble has had essentially zero effect on its growth as measured by GDP.

6. The slowdown in China's largest export market, the Eurozone, will have a marginal effect on China's overall growth rate.

7. The developing economies will continue expanding faster than the developed economies, and this rapid growth will continue pushing commodity demand and prices higher.

8. Geopolitical conflicts that might impact the supply of oil have all been priced into the price of oil.

9. Political developments in Europe will not disrupt global financial markets.

10. Global central banks (i.e. the ECB and the Federal Reserve) have effectively restabilized the global financial system via ample liquidity and massive expansions of money supply and balance sheets.

11. Volatility has been banished by this central bank-backstopped stability.

12. The strong yen will have negligible effects on the global economy or on Japan's growth and stability.

This is just a partial list of all the "good things" that are priced into global markets.If all of these good things are well-known and already priced in, then we have to ask what other good news could possibly turn up to drive prices even higher? If "positive surprises" are priced in, then how can positive surprises drive prices higher?

Put another way: if everyone who could buy in has already bought in to ride the "good news" wave on expectations of more good news to come, then where is the new money coming from to drive prices even higher?

If markets are indeed priced to perfection, then the second line of inquiry is: what happens if expectations of enduring stability and good news are dashed by "unexpected" bad news? Could volatility suddenly return from banishment? Could prices suddenly decline as the market reprices in risks that have been dismissed as non-factors?

Bulls have been claiming that the "good news" is a powerful trend that will only continue showering us with positive reports of ever-rising GDP, sales, revenues and profits. If that story is called into question, then how does a market priced to perfection reprice this doubt and risk?

How does a market priced to perfection reprice a "black swan" financial event, that is, a low-probability event that comes to pass despite the low odds? What if the official suppression of risk over the past 4 months has greatly increased the pressure in the global financial system and thus the odds of a Black Swan appearing "unexpectedly"?

These are questions to ponder in the weeks and months ahead. Time will tell if this is indeed a market priced to perfection or a market that has barely begun its march higher.

I have been unable access email this week; thank you for your patience and understanding.

Thursday, January 26, 2012

The U.S. and European economies are firmly between various rocks and various hard places.

Having stipulated that "Forecasting Is Not Humanity's Strength," I will not make any foolish forecasts that will assuredly be proven wrong, but it is undoubtedly true that the U.S. and Europe are both entering a "crunch time" politically and financially.

In essence, both economies are between multiple rocks and multiple hard places. Eventually, this ceases to be an academic question and becomes one of actual financial impact on people via higher taxes, smaller checks, lower purchasing power, etc.

For example, the dismal failure of the Federal Reserve's QE2 goosing of the economy has eroded its political support and thus its freedom of action. Fed Chairman Ben Bernanke has the look of someone who is realizing his own limits and is thus pondering retirement (a speculative forecast I made last year, i.e. that Ben wouldn't last and would be forced out or quit).

Bernanke has more or less confessed that he 1) doesn't understand why the economy isn't responding "like it should" i.e. as described in textbooks, and 2) that he is tired of the political heat created by QE2 and he is dropping the burden of "saving" the U.S. economy.

He looks like a person who has lost his confidence and is going through the motions until he can figure out a way to exit the leadership stage gracefully. It is painfully obvious to all that his QE2 did nothing to heal the real economy while attracting global attention and ire. The whole project was lose-lose, with the only gain being "extend and pretend."

Meanwhile, the Fed has to keep printing money to enable every debt holder has enough to service their debt next month, never mind next year. As frequent contributor Harun I. noted in a private email to me, the amount of leverage is so staggering that if "real money" (cash, gold, etc.) were applied to debt, a vast sum would still be left unpaid.

That's a rock and a hard place, to be sure, as I have noted on the blog: if you print enough money to keep the Status Quo in "extend and pretend" mode, then you get inflation, which creates another set of difficulties and acts as a tax on the entire economy.

The loss of faith in Fed fixes is profound, part of the delegitimization process I have mentioned in previous Musings and blogs.

The same loss of faith is evident in Europe. The EU leadership has to cobble together another "extend and pretend" bailout of Greece, but nobody believes it will fix anything--that belief has been shattered. Once that faith is lost, then the value of "extend and pretend" is lost as well.

There is no way Greece can meet its debt obligations, even as its creditors clamor for it to sell off its assets. Why bother, if most of the debt will remain unpaid? The answer is to transfer the wealthof thenation to international banks, of course, but the Greek people may not acquiesce in their impoverishment.

The only other option is for bondholders to "take a haircut," that is, get back less than 100% of their bond. The EU leaders are banking (pun intended) on some sort of "minor default" being the "fix" that puts the problem to rest, but they fail to grasp the subsequent loss of faith in the entire euro banking system.

If Greece's bondholders are going to take a loss, then what's stopping those holding Irish, Portuguese, Sanish or Italian debt from taking a loss as well?

The answer is of course nothing: there is no way to stop the "haircut" from happening in every cituation where the borrower is insolvent.

And as borrowers default, then so too do insolvent lenders.

This is the ultimate rock and hard place: the only way to clear the economy for future growth is to clear away the deadwood of uncollectible debts, yet clearing away the impaired debt will necessarily take down all the "too big to fail" banks on both continents, an action that is politically "impossible" as those banks have their hands on the throats of the governments in question.

As I have noted before, once faith in "extend and pretend" policies has been lost, then the next "extend and pretend" fix will no longer have its desired effect of calming the waters. Indeed, the failure of central institutions to grasp the nettle will be recognized as a failure that dooms the Status Quo.

The "solution" for three years has been "extend and pretend," and now that faith in that muddle-through strategy has been lost, then there are only two choice open to policy makers:

1) enact a visibly transparent "extend and pretend" fix once again, basically pushing the crisis forward once agin for a few weeks or months, or 2) grasp the nettle and pursue a politically "impossible" real fix that wipes out uncollectible debt and insolvent borrowers and lenders.

Unfortunately for the Status Quo, the cat is out of the bag, so to speak; nobody believes minor policy tweaks or more bailouts will actually fix their economies. So the "extend and pretend" fixes that will be presented as meaningful will be increasingly recognized as artifice and propaganda.

This will feed the profound political disunity that already characterizes the politics of the U.S. and the E.U.

I would like to believe that the people are finally ready to lead their leadership to real solutions, but their insecurity, doubt and fear about their own slice of the pie seems to have frozen them in a weird warp: they recognize "extend and pretend" is futile, but they have no confidence in the "impossible" choices, either, as the risk is doing anything other than "extend and pretend" frighten them.

The way out of the dilemma would be a new political consensus forms in favor of writing off all bad debt and breaking the banks' grasp on our collective throats. Right now that seems as "impossible," but all sorts of other "impossible" things have happened in the past decade.

The one thing we know is truly impossible is that "extend and pretend" will actually fix anything.

As noted here before, a number of intersecting cycles suggest the end-game of "extend and pretend" will play out in 2012-2013.

This entry is drawn from Weekly Musings 28. Weekly Musings Reports are sent to major contributors and subscribers as a thank-you for their support.

Wednesday, January 25, 2012

The widening divide between the Upper Caste and everyone below is not just of income and wealth--it is also cultural and values-based.

A recent Wall Street Journal article entitled The New American Divide by demographer Charles Murray described a widening cultural divide between the "haves" (the upper middle class, roughly the top 20% managerial/creative class) and the "have-nots," what many would call the lower middle class and working class.

Murray chose to focus on Caucasian Americans to avoid all the issues and emotions of ethnicity, but I think we can apply many of his class-related observations to ethnic minority populations in the U.S. as well.

This article (based on a forthcoming book) is important not because it encapsulates this tangled subject, but because it offers a well-researched first step to a much broader spectrum of issues that the author touches upon in passing.

The cultural divides the author cites is symptomatic of powerful financial and social forces that operate well below the surface of everyday life. I don't claim to have "answers" to these issues, but I find it remarkable that the author ends up concluding that community has been displaced by the Savior State, and the ultimate solution is to return to a life based on community rather than handouts and subsidies from the Savior State.

This aligns with my own conclusions stated in my books.

I think there is much that was left out of his carefully apolitical exploration of class in America and much left out of his general explanation for the widening divide betweem the "haves" and the "have-nots."

I think he is correct in fingering Savior State "free money" as the primary cause of the dissolution of working-class America's communities and households: with welfare, Section 8, food stamps, Medicaid, etc. then working-class women no longer need a husband to afford children, and men either drop out, become financially dependent on someone else, enter the "war on drugs"/prison complex or "work the system" to avoid working altogether.

He is also correct in pointing out the self-sustaining feedback loops created by Savior State support and Power Elite membership: both groups' children grow up in worlds where welfare or Elite status and perquisites are the expected norm. In this profound way, people grow up in completely different Americas, and these culturally inherited mindsets are very difficult to pierce and change.

What he delicately avoids exploring is the reality that the Status Quo works very well not just for the top 1% but also for the top 20% that forms what I call the Upper Caste of American society: the technocrat, managerial, creative class that does the heavy lifting for the top 1% who own most of the assets and income streams.

The bottom 80% is employed as service workers/debt serfs or bought off with bread-and-circus welfare to keep them quiet and passive. The system doesn't have to work for the bottom 80%, it just has to sustain them at a level that doesn't spark revolt.

The housing bubble was a gigantic scam foisted on the top layer of the working class and the lower layer of the middle class as a "sure-fire way" to join the speculative financial frenzy that enriched the top 1% and their enablers, the Upper Caste technocrat class. When the bubble burst, so did fantasies of living the Upper Caste lifestyle without the hard slog to a meaningful university degree and long hours slaving away for Corporate America to join the Upper Caste.

This notion that America no longer works for the bottom 80% (I would even say the bottom 90%) is something that standard-issue pundits like Murray cannot speak to or even admit. His "solution" is ultimately for the 80% to get on with life as an underclass and make the best of living in an economy which serves their interests only enough to avoid open insurrection.

Murray, a media-pundit in his field, studiously avoids the role of mass media in the creation of the divide. He touches briefly on the fact that we all once watched the same TV shows, a unifying cultral factor, but only because they were the only shows on TV. What I see, and what I believe research supports, is a vast chasm between the media the Upper Caste consumes and what the "have-nots" consume.

The really creative class is too busy to watch much TV or many films, or while away time texting and talking on cellphones. Rather, they create the context and content for these media and devices, and do so by avoiding addiction to their own creations--much like drug pushers never sample their own wares.

The managerial Upper Caste have all the devices and services, but their workload limits the amount of time they have to consume "entertainment" and communicate with text, twitter, email, etc. for amusement. But it is not just a matter of time constraints; they are highly conscious of the fact that consuming media and "entertainment" in quantity does not further their career. What provides the elitist sheen they desire to "fit in" to the upper tier of their caste?

The signifiers of membership in this High-Caste status are leisurely foreign travel in prestigious cities or exotic areas and foreign postings, study abroad, the ability to speak a foreign language, tasteful art in the home and office, facility with corporate-speak, participation in High-Caste cultural events such as the symphony, art-house foreign films, theater, an association (however flimsy) with an Elite university or other respected institution, pursuit of costly sports such as skiing, boating, etc., and last but not least, a network of associates and "friends" (real friendship being an increasingly rare commodity in America) who can be mentioned in conversation as owning/participating in these same high-caste signifiers.

The working class, on the other hand, is a voracious consumer of all media and entertainment; the TV is often left on 24/7 in working-class households and merely muted at night, and an iPod or internet radio is always providing a soundtrack to every activity, while Facebook (i.e. Global Channel of Me) can be a near-obsession, interrupting or taking precedence over all other activities, including, it seems, sex. Texting is constant, and social success is measured by signifiers such as the latest film on bootleg DVD, high-quality street drugs, large collections of films and music (i.e. media) and in rural areas, fishing and hunting trophies.

As correspondent Chuck D. recently observed, the divide extends to money management: the High-Caste class is deeply interested in investments and view high-earning investments as signifiers of status while the working class only sees the spectrum of consumption.

When High-Caste politicos like Al Gore or Mitt Romney attempt to cross the divide and mimic working-class signifiers, their attempts are either comical, wooden or downright painful. They live in a completely different America from the voters they are clumsily appealing to.

In some ways I have a bit of experience on both sides of this divide, having been lucky enough to graduate from an Elite prep school, snag a (non-Elite) university degree and gather the requisite bits of foreign languages and travel.

On the other hand, I worked in the construction/building field for many years alongside both deserters from Corporate/Central State America and working-class guys for whom construction was a relatively high-paying avenue to a middle-class life, if they saved their money (unfortunately not the norm).

There are two other critical long-term issues not addressed in the article:

1. The "mancession"-- the trend toward an economy that values the "female" skills of communication, cooperation and education, while the "male" virtues of a strong back and a physical-world skill have steadily lost value. This is a very complex set of issues, but we can "state the obvious" by noting that the decline in factory/manufacturing work has apparently hurt males more than females, who have shifted to retail, healthcare, pink-collar and government work more readily than working-class males.

2. The ladder from the lower classes to the Upper Caste--upward mobility--is crumbling. Many commentators have noted that the gateway of upward mobility has narrowed. Yes, anyone can "make it in America," but making it America requires an increasing number of cultural knowledge bases and values--the very values and knowledge bases that are eroding in the classes below the top 20% Upper Caste.

While Murray describes the complex and knotty issue of declining marriage rates and soaring out-of-wedlock births, the larger question is what is powering these trends. Are men simply no longer needed as breadwinners, or are they being "selected out" for other reasons? Could the mass media once again be a critical if unspoken factor, as it has presented malehood as little more than an extended adolescence without end and fatherhood as a role for bumbling losers?

Yes, it's easy to "blame the media" but once again we must start by asking who is absorbing thousands of hours of this politically convenient (i.e. distracting and deranging) "entertainment" and who avoids it like the plague. How can ceasless propaganda not influence those who watch it daily for hours on end?

As many oftwominds readers have noted, Step 1 in liberating oneself from propaganda is to stop watching broadcast TV.

This divide speaks very directly to the core problems we face, which are not simply financial or political but cultural.

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